Investors Could Be Concerned With Expleo Solutions' (NSE:EXPLEOSOL) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So while Expleo Solutions (NSE:EXPLEOSOL) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Expleo Solutions is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.28 = ₹653m ÷ (₹3.0b - ₹690m) (Based on the trailing twelve months to December 2021).

Thus, Expleo Solutions has an ROCE of 28%. In absolute terms that's a great return and it's even better than the IT industry average of 13%.

See our latest analysis for Expleo Solutions

Historical performance is a great place to start when researching a stock so above you can see the gauge for Expleo Solutions' ROCE against it's prior returns. If you'd like to look at how Expleo Solutions has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Expleo Solutions' ROCE Trending?

On the surface, the trend of ROCE at Expleo Solutions doesn't inspire confidence. Historically returns on capital were even higher at 41%, but they have dropped over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Expleo Solutions. And the stock has done incredibly well with a 199% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing to note, we've identified 2 warning signs with Expleo Solutions and understanding them should be part of your investment process.

Expleo Solutions is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.